We retired our "Five Bull Market Barometers" in 2020 to make room for a new weekly post that's focused on the three most important charts for the week ahead.
This is that post, so let's jump into this week's edition.
This is one of our favorite bottom-up scans: Follow the Flow.
In this note, we simply create a universe of stocks that experienced the most unusual options activity — either bullish or bearish… but NOT both.
We utilize options experts, both internally and through our partnership with The TradeXchange. Then, we dig through the level 2 details and do all the work upfront for our clients.
Our goal is to isolate only those options market splashes that represent levered and high-conviction, directional bets.
We also weed out hedging activity and ensure there are no offsetting trades that either neutralize or cap the risk on these unusual options trades.
Welcome back to our latest Under the Hood column, where we'll cover all the action for the week ended March 18, 2022. This report is published bi-weekly and rotated with our Minor Leaguers column.
What we do here is analyze the most popular stocks during the week and find opportunities to either join in and ride these momentum names higher, or fade the crowd and bet against them.
We use a variety of sources to generate the list of most popular names.
There are so many new data sources available that all we need to do is organize and curate them in a way that shows us exactly what we want: a list of stocks that are seeing an unusual increase in investor interest.
In this weekly note, we highlight 10 of the most important charts or themes we're currently seeing in asset classes around the world.
A Reversal In Risk
Not only are the most battered areas of the market digging in at logical levels of support and resolving higher, so is high-yield debt relative to Treasuries (HYG/IEI). This crucial ratio is an inverse illustration of credit spreads as we’re comparing the bond prices instead of the yields. HYG/IEI putting in a potential failed breakdown and resolving higher speaks to a reprieve in market stress and bodes well for risk assets. It’s no coincidence that we’re seeing similar action at the index level as the S&P 500 is back above its January lows. Bulls want to see this ratio catch higher in the coming weeks as this would support a tradable low and fresh rally for stocks as risk-seeking behavior re-enters the market. There is still some work to do, but we’re moving in the right direction.
Check out this week's Momentum Report, our weekly summation of all the major indexes at a Macro, International, Sector, and Industry Group level.
By analyzing the short-term data in these reports, we get a more tactical view of the current state of markets. This information then helps us put near-term developments into the big picture context and provides insights regarding the structural trends at play.
Let's jump right into it with some of the major takeaways from this week's report:
* ASC Plus Members can access the Momentum Report by clicking the link at the bottom of this post.
Fed and bond market moves become headwinds for stocks.
In addition to these market concerns, the liquidity backdrop is presenting a more acute challenge for equities. The Fed raised rates 25 basis points last week and the futures market is now looking for another 100 basis points of tightening combined at the May and June FOMC meetings. Corporate bond yields are rising at their fastest pace since the financial crisis and more than half of global central banks are now in tightening mode. During the last cycle, it took the 2-year Treasury yield more than 6 years to move from its low to back above 2%. This cycle it completed that move in just over 1 year. The pace of tightening (from the bond market and from the Fed) matters for equities. Stocks tend to struggle when that pace is elevated, as it appears to be in this cycle.
For some time, we've reiterated our neutral approach. By staying out of the market in this sloppy tape, we've avoided emotional and financial whipsaws.
During this period, we've been downright obnoxious about how little edge there is in pushing longs.
But this could finally be changing.
As we'll discuss in today's note, we're seeing signs selling pressures are beginning to subside. Price action is heavily coiled, and the clock's ticking for a resolution out of this range.
Looking ahead into April, we forecast a high probability of an upward resolution from this consolidation.
Trading opportunities aren't limited to just U.S.-based corporations. And thanks to ADRs, we don't have to go to other foreign exchanges to exploit opportunities in different countries. These companies have tracking shares -- often with tremendous liquidity -- on our exchanges here.
One such opportunity, with a big base that is showing signs of resolving higher, recently appeared in our International Hall of Famers report last week.
The highlight of today’s list is the Altimeter Capital Form 4, which revealed a $7 million purchase in the mid-cap software stock Confluent $CFLT.
Altimeter now owns 5,131,700 shares of CFLT.
There was also a significant Form 4 filing by Sequoia Capital’s Roelof Botha, detailing a purchase in the diagnostics and research company Natera $NTRA.
Botha purchased roughly $5 million of NTRA stock, bringing his total share count to over 1.3 million.
